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  • Hub You - Market Timing Strategy - The Day-After Options Expiration (With a Twist)

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    n (Friday) and the return on the day after (Monday). When Friday was down, Monday tended to also be down, and vice-versa.

    Showing this without the benefit of a table is a bit difficult, but let’s give it a shot. When the expiration day (Friday) was up, the day-after (Monday) was also up 46.98% of the time

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    Savvy investors know that the stock market has historically been weak on the Monday following options expiration and may choose to go short (or at least not go long) on that day. In this article, we double the predictive power of that rule with our own little twist.

    What is the day-after options expiration? Equity and index options all expire after the close of trading on the third Friday of each month. The “day-after options expiration” then is usually the following Monday. Note: traders can find a calendar of options expiration dates on the CBOE’s website at www.cboe.com.

    Between 1970 and 2006, there have been 444 of these options expiration days. We're going to ignore the one in October of 1987 because as we all know on that Monday the market fell a whopping -20.47% and we don't want that to skew our results.

    Of the 443 remaining days, 58.47% were followed by a down Monday with an average return of -0.15%. That's a pretty consistent observation in an otherwise bullish period - the day-after options expiration tends to be a down day.

    The Twist

    But while looking at this issue, we also found this little nugget - there was a strong correlation between the return on the day of expiration (Friday) and the return on the day after (Monday). When Friday was down, Monday tended to also be down, and vice-versa.

    Showing this without the benefit of a table is a bit difficult, but let’s give it a shot. When the expiration day (Friday) was up, the day-after (Monday) was also up 46.98% of the time

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    ation? Equity and index options all expire after the close of trading on the third Friday of each month. The “day-after options expiration” then is usually the following Monday. Note: traders can find a calendar of options expiration dates on the CBOE’s website at www.cboe.com.

    Between 1970 and 2006, there have been 444 of these options expiration days. We're going to ignore the one in October of 1987 because as we all know on that Monday the market fell a whopping -20.47% and we don't want that to skew our results.

    Of the 443 remaining days, 58.47% were followed by a down Monday with an average return of -0.15%. That's a pretty consistent observation in an otherwise bullish period - the day-after options expiration tends to be a down day.

    The Twist

    But while looking at this issue, we also found this little nugget - there was a strong correlation between the return on the day of expiration (Friday) and the return on the day after (Monday). When Friday was down, Monday tended to also be down, and vice-versa.

    Showing this without the benefit of a table is a bit difficult, but let’s give it a shot. When the expiration day (Friday) was up, the day-after (Monday) was also up 46.98% of the time

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    , there have been 444 of these options expiration days. We're going to ignore the one in October of 1987 because as we all know on that Monday the market fell a whopping -20.47% and we don't want that to skew our results.

    Of the 443 remaining days, 58.47% were followed by a down Monday with an average return of -0.15%. That's a pretty consistent observation in an otherwise bullish period - the day-after options expiration tends to be a down day.

    The Twist

    But while looking at this issue, we also found this little nugget - there was a strong correlation between the return on the day of expiration (Friday) and the return on the day after (Monday). When Friday was down, Monday tended to also be down, and vice-versa.

    Showing this without the benefit of a table is a bit difficult, but let’s give it a shot. When the expiration day (Friday) was up, the day-after (Monday) was also up 46.98% of the time

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    rn of -0.15%. That's a pretty consistent observation in an otherwise bullish period - the day-after options expiration tends to be a down day.

    The Twist

    But while looking at this issue, we also found this little nugget - there was a strong correlation between the return on the day of expiration (Friday) and the return on the day after (Monday). When Friday was down, Monday tended to also be down, and vice-versa.

    Showing this without the benefit of a table is a bit difficult, but let’s give it a shot. When the expiration day (Friday) was up, the day-after (Monday) was also up 46.98% of the time

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    n (Friday) and the return on the day after (Monday). When Friday was down, Monday tended to also be down, and vice-versa.

    Showing this without the benefit of a table is a bit difficult, but let’s give it a shot. When the expiration day (Friday) was up, the day-after (Monday) was also up 46.98% of the time with an average return of +0.04%. However, when the expiration day was down, the day-after was up only 35.55% of the time with an abysmal average return of -0.36%.

    The point of all those numbers is that we can double the predictive power of the day-after rule by considering the returns on the day of expiration. If expiration Friday is down, smart investors might choose to avoid being in the market on Monday or even going short.

    This isn’t an entire trading strategy in and of itself, but it's so rare that we find an idea that has been able to successfully short the market over an extended period of time that we think it’s a worthy addition to the trader's toolbox.

    Happy Trading!

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